1. In the 1900s, five firms supplied amateur color film in the United States: Kodak, Fuji, Konica, Agfa, and 3M. From a technical viewpoint, there was little difference in the quality of color film produced by these firms, yet Kodak's market share was 70 percent. The own price elasticity of demand for Kodak film was -2.0 and the market elasticity of demand was -1.25. Suppose that in the 1900s, the average retail price of a roll of Kodak film was $7.00 and that Kodak's marginal cost was $3.00 per roll. Based on this information, discuss industry concentration, demand and market conditions, and the pricing behavior of Kodak in the 1990s. From a managerial economics point of view, do you think the industry environment is significantly different today? Explain.
2. A certain industry with five firms is under scrutiny due to an impending merger. Firm 1 has 40% of the market while firm 2 and 3 has 20%. The remaining firms have 10% each. What is the Herfindahl-Hirschman index for the industry? Based on DOJ guidelines, do you think it is likely that the Justice Department would block a merger between firms 4 and 5? What factors about the HHI computations might the department consider as it decides?
3. In 1955, Akio Morita, founder of Sony, came to the U.S. to drum-up sales for a new product his company had recently developed. Morita anticipated that Sony would sell approximately 30,000 transistor radios per year to get started. A chain store executive was stunned when Morita spurned his offer to immediately buy 100,000 units. Morita politely sketched a unit costing diagram to explain why 5,000 was too small of an order but 50,000 units was at the same time too big.
a) What was Morita drawing and what did he know about costing that the chain store representative was overlooking? Be sure to describe or chart the shape of Morita's costing sketch in your answer.
b) How is timeframe important to your explanation?